simoan wrote:88V8 wrote:dealtn wrote:How do you avoid it then?
By not needing to.
Our divi/coupon interest more than suffices for our needs & wants and funds two full annual ISA subs.
So I don't, in practice. do TR. Other than using the annual limit.
This is interesting and is at the root of my issue with the income only approach i.e. it only works for someone if they start out with a very large pot of money in the first place. It is a really bad way to grow wealth through equity investment for those with smaller pots and less wealth. If you can put £40k into ISA's and maybe generate another £30-40K for living expenses just through dividends received then you are looking at a pot of £2m or so.
That's fine and works for very wealthy individuals, but to propose an equity income only strategy to those with much smaller investment pots who may be just starting out on their investment journey is just plain wrong. I'd go further, it's dangerous, because investing in high yield equities offers poor risk/reward for the vast majority of investors.
All the best, Si
Bear in mind that the original HYP1 (Pyad) was formed by a 'Value' player, who perhaps saw dividend yield as being a simple measure of relative value (distressed situations where stocks might continue to fade or rebound relatively strongly) broadly diversified across sectors in initial capital equal weighting. That once bought the intent was to hold forever. And where by selecting big blue-chip type stocks the risk of total failure was less likely.
From my personal observations HYP1 (non tweaked), TJH HYP (tweaked), a basket of IT's (B7/B8/whatever) have all tended to yield similar overall total return outcomes, at least across 1997 to 2020 years inclusive type ranges that I've measured. Similar also to the FT250 index outcome - that includes around 50 IT's and subsets of stocks that might be considered as HYP like holdings.
In contrast the FT100 (and also FT All Share as a large part of that is a heavy weighting of FT100 stocks) has been pretty dire. Suggestive that the mechanical method upon which that FT100 is based can be a poor choice. Generally it was hit hard by the dot com, and again by the 2008/9 financial crisis ...etc. I saw similarities to that and Japan's lost two decades, when you invest heavily into giants that even after they stumble/decline a lot they're still relatively big, then you're carrying those stocks that might never recover former high levels, at least not for decades. The FT250 mid cap in contrast feeds both in and out of the bottom/top, giants are ejected into the large cap index for that to bear such risk. FT250 is more like a equal weighted type holding in some respects with no single stocks/sectors tending to become excessively overweighted. Yes the FT250 sector weightings do indicate relatively heavy Financials exposure, but that includes the 20% or so of Investment Trusts that it includes that individually diversify broadly but are counted under 'Financials'.
HYP's historically have tended to be more volatile, so similar risk with more volatility = lower risk adjusted reward (lower Sharpe Ratio). Relying upon dividends for income/spending is also volatile, in contrast alternatives such as SWR provide a regular inflation adjusted income.
Many HYP'ers seem to have enough alternative sources of income such that stock income is icing. Perhaps £20K/year of pension income that covers basic spending, and where stock income/dividends pay for cruises/whatever (non necessities). Or that have sufficient wealth such that even if dividend income halved or more the amount of income was still sufficient to cover spending on necessities (£1.5M+ type portfolios where 4%/£60K income being cut to 2%/£30K was still 'enough'). For others, perhaps £500K portfolio value, no occupation/state pension and more reliant upon that providing at least £20K/year (4%), a reduction to £10K dividends (dividends halve) could be unacceptable. A factor however is that after perhaps a decade, maybe a 60 year old hitting 70, and a 4% SWR average type case tends to see considerable real gains in addition, maybe £500K start date portfolio value having risen to in excess of £1M in inflation adjusted terms and after SWR withdrawals. More so over recent decades as interest rates have transitioned from high 1970/1980 levels down to low 0% levels that acted as a rising tide effect. Forward time however and that tide is more inclined to turn and see it recede. Using the 1980 to recent history of 'average stock rewards' is not a good foundation upon which to build.
The conclusions I came to were not to rely upon a single index as even indexes exhibit deviations/differences and/or might be based on what turns out to be a poor mechanical selection method. Also don't rely upon a single method such as 100% stock, as each such style has its bad times. Blending 50/50 stock/bonds with 100/0 is a form of diversification that reduces the risk of being in either the 50/50 or 100/0 worst case outcomes alone, i.e. 75/25 combined is safer/better than 100/0. And diversify across currencies as otherwise a single currency risk could be devastating. Holding a bunch of stocks that have foreign exposure isn't necessarily currency diversified as many firms hedge their FX exposure back to the domestic currency as that is more inclined to yield less erratic earnings etc.
Yet another factor is that much of historic 'average stock' rewards are backward looking, weren't actually held. 30+ years ago investors might have been more attracted to FT30 type stock index sets that since have been superceded by 'better' alternatives that yielded higher/better results as the suggested historic average outcome. And yet another factor is that historically taxes/costs were much higher, long term average around 38% for basic rate taxpayers, and that tended to spike at the worst possible times (as the circumstances inducing bad times also had the state looking to bolster its income to cover its spending). The Stones self exiled for such reasons as 95%+ tax rates, as did the Beatles sing 'Taxman', 19 for you 1 for me ... in reflection of 95% tax rates. Even more mortal beings, Joe Average were paying around 40% tax rates. 16% inflation, 16% interest, 40% taxation = -6.4% real reward, that if supplemented by drawing 4% for spending !!